A Contribution to Health-Capital Theory
55 Pages Posted: 2 May 2015
Date Written: April 23, 2015
The Grossman model is the canonical theory of the demand for health and health investment. This paper provides strong support for the model's canonical status. Yet several authors have identified at least four significant limitations to the literature spawned by Grossman's seminal 1972 papers. I show that these criticisms are not the result of a flawed model but of an unfortunate and unnecessary choice for the functional form (linear in investment) of the health-production process, and of an incorrect interpretation of the equilibrium condition for health. I find that a generalized Grossman model, with decreasing returns in investment and endogenous longevity, addresses the limitations, and provides a remarkably successful foundation for understanding decisions regarding health.
Keywords: socioeconomic status, health, demand for health, human capital, health behavior
JEL Classification: D91, I10, I12, I14, J24
Suggested Citation: Suggested Citation